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Traditionally the dilemma was simple: building an application was expensive and slow, but the resulting product perfectly filled the company?s needs. Buying a packaged solution saved time, but the software would typically fulfill only 80 per cent of user needs. The initial purchase costs were high, and the company would need to build internal know-how to maintain the software.

Application outsourcing, or rental, shares some characteristics with buying a packaged solution, believes Gossain, because it?s only an 80 per cent fit, but it saves on implementation time. However, software rental differs in that it has a low startup cost, and the maintenance can also be outsourced. On the negative side, the outsourced application is often badly integrated with a company?s other systems.

"There has been a lot of hype in this area," said Chandra Patel, president and chief executive officer of Isys Solutions, an enterprise resource planning (ERP) and Internet consulting firm. Patel said many ERP vendors, such as SAP and Baan, now see application outsourcing as a magic bullet to reach small and medium businesses and hit recurring revenue streams.

According to research from IDC, the most popular candidate for outsourcing is payroll administration. About 25 per cent of businesses would prefer to outsource that particular application. Ecommerce is a distant second, with 10 per cent of businesses intent on outsourcing it.

Jonathan Vaughan, vice president of research and development at Prudential Insurance of north America, said his company has in different instances decided to build, buy or rent certain applications. Vaughan said that the outsourcing model made sense in certain circumstances. For instance, when an enterprise wants to expand into a new area ? such as ecommerce ? but does not immediately want to invest in the necessary infrastructure.

"The quality of the relationship [with the service provider], the degree of commitment between partners is going to be crucial to the success of the model," said Vaughan. But he warned of the risk of vendor lockin. "There is no free lunch," he concluded.

Application outsourcing is far from being a mature market ? and few of the providers have much experience in this type of service. Companies rushing into this space include ERP vendors such Oracle and Siebel, and Internet Service Providers but also established IT services companies such as EDS.

Vaughan said that service providers are offering various very different pricing models. "You definitely have to go to different suppliers and look at their price models," he advised.

Isys? Patel had the same advice, but added: "Application Service Providers are desperate for customers right now, and the rules are not yet set. So you can get some pretty good deals right now."

However, Gossain interjected that the pricing models of these service providers have typically been short term. "I have seen no long term pricing projections, because frankly, noone knows," warned Gossain.

He compared the current situation with the rise of the client-server model. "Client-server was supposed to be cheaper than the mainframe. We all know how that turned out."